Lending borrowed capital — the essence of banking — is risky. That risk is amplified when interest rates are very low, as they were in the early 2000s because of a mistaken decision made by the Federal Reserve under Alan Greenspan to force interest rates down and keep them down. Because houses are bought with debt (for example, an 80% first mortgage on a house), low interest rates spur demand for houses. And because the housing stock is so durable a surge in demand increases not only housing starts but also the prices of existing houses. When people saw house prices rising — and were assured by officials and other experts that they were rising because of favorable “fundamentals” — Americans decided that houses were a great investment, and so demand and prices kept on rising.

charlie rose continues to tackle the credit crisis on his show…came across this clip on ‘the big picture’ blog. big take away is that the credit rating agencies that gave Fannie/Freddie/AIG AAA rating we’re one of the central causes of collapse.